Explainer: understanding merchant pricing models – blended, IC++, and IC+

Understanding merchant service charges: blended, IC++, and IC+ explained

Which pricing model to adopt for Merchant Service Charges (MSC) is a critical decision for merchants that can significantly impact their bottom line. IC++ (Interchange Plus Plus), IC+ (Interchange Plus), and blended pricing models are the main choices. This explainer outlines how the MSC is structured, compares the pricing models, and highlights which types of merchants typically favour each, based on their size, risk profile, and transaction mix.

This explainer uses MSC, the term most used in the UK and much of Europe, to describe the total fee a merchant pays on each card transaction, including interchange, scheme fees, and acquirer markup. In the US and several Asian markets, the equivalent concept is called the Merchant Discount Rate (MDR), often used when referring to a single blended percentage (e.g., ‘a 2.2% MDR’).

The structure of MSC pricing

The pricing models always contain the same three elements of the MSC: interchange fee, scheme fee (card network fee), and acquirer markup. It is how these elements are communicated to merchants and applied which distinguishes the MSC pricing models.

1. Interchange fees are the largest component of MSC and are fixed, in the sense that they are non-negotiable for the acquirer or merchant. This is a fee component that flows from the acquiring bank to the card-issuing bank, compensating them for handling card transactions. Since December 2015, interchange fees in the European Economic Area (EEA) and the UK have been capped at 0.2% for consumer debit cards and 0.3% for consumer credit cards under the Interchange Fee Regulation (IFR). In the US, interchange fees remain largely unregulated for credit cards and can range from 0.5% to over 3% (the average interchange fee is 1.81%). In Australia, credit card interchange fees are capped at a weighted average of 0.5% of transaction value, with a ceiling on any individual rate of 0.8% of transaction value. For debit and prepaid cards, interchange is capped at a weighted average of AUD 0.08 per transaction, with a ceiling on any individual rate of AUD 0.10 per transaction (or 0.2% if expressed as a percentage).
2. Scheme fees are charged by the card networks, such as Visa and Mastercard, to acquirers for using their infrastructure. Unlike interchange fees, scheme fees are not subject to regulatory caps, but acquirers do pass these costs on to merchants as part of the MSC, either explicitly (IC++) or implicitly (blended or IC+).
3. The acquirer markup is the third component of MSC, and it is charged by the acquirer to the merchant, covering the operational costs, technology, support, compliance, and profit margin. It is the only negotiable component.

Variables such as card type (debit, credit, consumer, or commercial), transaction mode (card‑present vs card‑not‑present), security level (SCA, biometric authentication, tokenization level), transaction value, and geography (including whether the issuing bank and the acquiring bank are in the same region) can all impact the fee components.

Card-not-present ecommerce transactions typically carry a higher MSC than equivalent in-store transactions because of greater fraud and chargeback risks. The type of goods or services a merchant sells will also impact the MSC, since there are varying risk profiles across products. A merchant selling digital goods and subscriptions which have instant fulfilment (e.g., software apps, music downloads) will have a different risk profile from a merchant selling physical goods that require shipping (e.g., fashion, household goods). This fulfilment risk can leave the acquirer exposed to chargebacks – and therefore these types of goods, determined by the Merchant Category Codes (MCCs), will push up the MSC.

Beyond the MSC components themselves, the way the fees are structured can also vary. There are typically three ways acquirers structure the fees:

• Ad valorem (percentage only): a simple percentage of the transaction value (e.g., 1.5%).
• Per transaction (fixed fee): a flat fee in pence/cents (e.g., USD 0.10).
• Hybrid: a combination of both (e.g., 0.5% + USD 0.05).

A hybrid structure is often used to balance fairness across transaction sizes. For low-value transactions, the fixed fee dominates. A USD 10 transaction at ‘0.3% plus USD 0.20’ costs USD 0.23 (USD 0.03 percentage plus USD 0.20 fixed), representing a 2.3% effective rate. For high-value transactions, the percentage component dominates. A USD 500 transaction at the same rate costs USD 1.70 (USD 1.50 percentage plus USD 0.20 fixed), representing a 0.34% effective rate.

Whilst this structure prevents excessive fees on large items, merchants with very small average transaction values (ATVs) must be careful, as the fixed-fee element can drastically inflate their effective percentage rate. A coffee shop with USD 5 average transactions could face effective rates of 4-6%, which may be materially higher than alternative fee structures for that merchant. This structural choice sits on top of the pricing models below.

Blended pricing: simple by design

Blended pricing aggregates, or blends, all three cost components – interchange, scheme fees, and acquirer markup – into a single set percentage. For most general retail merchants, this rate will usually fall in the low‑single‑digit range (for example, around 1.5%-3.0%), but these figures are illustrative only, and actual rates vary by provider, merchant type, and market.

Under blended pricing, merchants pay the same flat percentage fee, regardless of card type or costs. For example, a merchant on a 2.5% blended rate pays exactly USD 2.50 on every USD 100 transaction, whether the customer uses a low-cost debit card or an expensive premium rewards credit card. The fee could also be structured as a hybrid blended rate (e.g., 1.9% + USD 0.10). This is common for merchants with wide-ranging transaction values, ensuring the acquirer covers fixed costs on small transactions whilst offering a lower percentage on larger ones.

Globally, it is the model most seen amongst SMEs, which can more accurately forecast costs. It is the dominant model in developing markets, because many merchants are new to card acceptance and so may not understand the nuances of different fee types.

For example, for a neighbourhood hair salon on a USD 1.5 million annual card turnover, a 1.8% blended MSC would equate to around USD 27,000 per year in card processing costs, which is easier for them to forecast and budget.

Advantages

Blended pricing offers simplicity and predictability; it allows merchants to predict the MSC with more certainty, as it is a fixed fee that is applicable to all transactions. This is arguably easier to comprehend and plan for, since there is only one variable involved. This can also help reduce the administrative burden, hence why it is the more common pricing model for SMEs.

Disadvantages

The main disadvantage is a lack of transparency, as merchants have no visibility into how rates are calculated or what proportion represents the acquirer's markup versus actual fees. Blended pricing typically results in higher overall costs for merchants, particularly those processing significant volumes. Acquirers can theoretically charge a higher markup under blended pricing since the merchant has no insight into the actual figure. For merchants with a favourable card mix (predominantly debit cards), blended rates can also mean overpayment.

For example, consider two merchants with the same ATV and similar goods, both paying a blended MSC of 2.0%. Merchant A’s card mix is 80% debit and 20% credit, whilst Merchant B’s mix is 40% debit and 60% credit. Debit transactions would typically be priced at around 0.6-0.8% under an IC++ model – and credit closer to 1.3-1.5% (purely due to the higher interchange fees for credit cards). With an annual card turnover of USD 1 million, the blended price paid by both merchants would be USD 20,000. For Merchant A, their effective cost if unblended would be USD 8,400, whilst Merchant B’s effective cost would be USD 11,200. Both merchants are overpaying, but Merchant A, which has the debit-heavy card mix, is overpaying by about 32% more.  

IC++ pricing: full transparency

IC++ pricing breaks down transaction costs into three components, providing merchants with the most transparent overview of their MSC pricing.

Under IC++, merchants are charged the interchange fee (which varies by card type), plus the scheme fee charged by networks, plus a pre-negotiated fixed acquirer markup. This markup is flexible in its structure; it can be agreed as a flat percentage (e.g., 0.60%), a fixed per-transaction fee (e.g., USD 0.05), or a hybrid of the two. For example, a USD 100 in-store debit card transaction might cost: 0.2% interchange (USD 0.20), 0.1% scheme fee (USD 0.10), and 0.6% acquirer markup (USD 0.60), totalling USD 0.90 or 0.90%.

This granular breakdown of fees tends to be more attractive to larger merchants with dedicated finance teams that can go through every aspect of their costs – and can make data-driven decisions based on it.

Advantages

The primary advantage is transparency, enabling merchants to understand where every penny goes – and potentially pay lower fees. Under a blended pricing contract, the acquirer may set a higher rate to protect themselves against all the variability in costs. IC++ passes through the true underlying costs, and so the acquirer does not need to add this buffer, and so merchants may pay a lower rate (however, this is not guaranteed). This visibility allows merchants to make better-informed pricing decisions. Furthermore, since merchants can see exactly what the acquirer markup is, they have a greater opportunity to negotiate this cost down, especially the larger merchants. This model can also provide merchants with the ability to steer customers towards the use of transaction instruments that are cheaper, since the merchants have increased transparency on these costs.

Disadvantages

Transparency comes with complexity; merchants must understand card type distinctions, interchange rate variations, and scheme fees. Additionally, in certain markets (e.g., the US), there is no interchange cap, and rates can differ massively depending on several factors. This leads to the degree of complexity multiplying as each different card incurs its own interchange rate. Cost predictability suffers, as monthly costs fluctuate based on card mix, interchange/scheme fee schedule changes (typically twice yearly for scheme fees), and transaction patterns. This can impact cash flow and profitability.

IC+ pricing: the middle ground

IC+ represents a middle ground: interchange fees are kept as a separate fee component, whilst scheme fees and acquirer markup are combined into a single markup fee.

A merchant might have a cost of ‘interchange plus 0.8%’, meaning they pay actual interchange rates plus 0.8% combined markup covering both scheme fees and acquirer margin.

IC+ provides more transparency than blended pricing but less than IC++. Merchants can see how much the interchange component costs (which they cannot control) versus the markup (which includes scheme fees and negotiable acquirer margin). However, they cannot distinguish between what portion represents scheme fees versus acquirer profit.

IC+ is typically offered to merchants with annual card turnover between USD 10-50 million, merchants large enough to demand some transparency but not requiring full IC++ complexity.

Comparing the models: key differences

The fundamental trade-off across these models is transparency versus simplicity. IC++ offers complete visibility into all cost components but requires a more in-depth understanding. Blended pricing offers maximum simplicity with minimal transparency. IC+ occupies the middle ground.

Cost implications depend heavily on transaction volumes:

• High-transaction volume businesses processing over USD 50 million per year typically benefit most from IC++.
• Mid-sized businesses with USD 10-50 million in transaction volume often find IC+ optimal, balancing transparency with simplicity.
• Small businesses processing under roughly USD 5-10 million in transaction volume usually find blended pricing most suitable, with simplicity outweighing cost optimisation potential.

Separate from the pricing models also lies the fee structure. A hybrid fee structure gives more flexibility for merchants with varying transaction sizes, but a fixed or ad valorem fee structure may be more suited to certain merchants.

Regulatory and regional differences

The EU, UK, US, and other major markets handle interchange and merchant pricing very differently, which shapes how common the models are.

The European Union's Interchange Fee Regulation

The Interchange Fee Regulation (IFR), which took effect in 2025, capped interchange fees at 0.2% for consumer debit cards and 0.3% for consumer credit cards within the EEA. It also pushed for transparency by requiring acquirers to show merchants an unblended breakdown of fees, unless the merchant explicitly agrees in writing to a blended rate, which in practice means IC++ (or similar unblended models) must be available across the EEA.

However, the IFR does not cover commercial cards (which remain uncapped) or directly regulate scheme fees; these areas continue to be monitored by regulators and industry observers.

Post-Brexit UK, US, and Australia comparison

The UK kept the core IFR caps and transparency rules for domestic transactions after Brexit, so consumer debit and credit within the UK remain subject to 0.2% and 0.3% caps.​ However, once the UK left the EEA framework, Visa and Mastercard raised card‑not‑present interchange on cross-border UK-EEA transactions to around 1.15% for debit and 1.5% for credit, far above capped domestic levels.

The US presents a stark contrast. Credit card interchange fees remain almost entirely unregulated, typically ranging from 1.5% to over 3%. The main regulation is the Durbin Amendment, capping debit card interchange at 0.05% plus USD 0.21 for large banks. This higher-cost environment means US merchants face substantially higher payment processing costs, with IC++ typically reserved for very large merchants. Transparency requirements are also less stringent. The huge range of interchange fees and additional service fees means that when the invoice comes in from the acquirer, even the most seasoned expert can struggle to understand it.

Australia sits somewhere between the EU/UK model and the US approach. There, direct interchange caps and weighted averages have pushed acquirers to more transparent models. The RBA (Reserve Bank of Australia) is actively considering several options for interchange fee settings, ranging from reducing the credit card weighted average cap to 0.3% and abolishing the individual ceiling rates, to separating the rates for commercial and consumer credit cards. How this regulation evolves will impact the pricing models for merchants and acquirers in Australia.

Similar caps in Brazil (0.5% cap on debit card interchange and 0.7% cap on prepaid cards) highlight the global movement towards establishing set limits on interchange rates.

Final thoughts

The choice of MSC pricing models carries financial implications for merchants. High-volume merchants with dedicated finance teams often gain the most from IC++ pricing's transparency, which enables data-driven negotiations to reduce acquirer markups and optimise costs – though savings depend on leveraging that visibility rather than the model itself. Smaller merchants, by contrast, typically favour blended pricing's straightforward predictability, even if it means accepting somewhat higher overall fees and less insight into components.

Regardless of jurisdiction, merchants with material card turnover often benefit from a dedicated internal cost-analysis team – or from partnering with an external specialist that can regularly review statements, update acquiring contracts, and understand local regulatory nuances. A simple diagnostics checklist before choosing/renewing a pricing model can help merchants select the best pricing model.

Ultimately, the optimal pricing model depends on the merchant: transaction volume, card mix, ATVs, financial capabilities, and tolerance for cost variability. Regularly reviewing payment model arrangements – and periodically running benchmarking exercises – with trusted and independent third-party specialist firms ensures merchants remain on the most appropriate pricing structure over time.

Note: Unless otherwise stated, the advantages and disadvantages set out are from the merchant’s perspective rather than the acquirer’s.

This article is part of The Paypers’ Explainers section. To access other educational materials from this section, click here. If you have suggestions about other topics that could be included in this section, we invite you to write to us at editor@thepaypers.com.

Full list of sources

1.      Blended Pricing Vs Interchange Plus (IC+) - Which Is Best?

2.      What Are Scheme Fees & How Are They Calculated?

3.      Interchange Fees | Merchant Card Payment Costs and Surcharging – Consultation Paper | RBA

4.      Merchant acquiring profitability: a piece of cake or a pig in a poke?

5.      Backgrounder on Interchange and Scheme Fees | Explainer | RBA

6.      Time Has Come To Cap Prepaid Card Interchange Fees, Brazil Says

About the author

Reuben Joseph is a Business Analyst at Edgar, Dunn & Company, supporting clients worldwide in developing strategies across payments, fintech, and digital commerce. With a background in financial analysis and market research, he focuses on enhancing client competitiveness in the rapidly evolving payments sector.